1/08/01 Investment House Daily
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TONIGHT:
- Indexes sink on low volume and then kick it into gear in the last hour.
- After hours AMZN and ITWO say raise those earnings expectations. We
think there is more to come as we have been saying.
- McTeer speaks about the fourth quarter early; it must be a bad one.
Another day of sinking on the major indexes, but volume was low and a
rally ensued.
The indexes were dropping lower and lower, and the television commentators
were getting glummer. Sure it was no fun, but as we were saying over the
weekend in many of the plays, stocks could slide lower to support before
catching and moving up. That is what happened today. There was not
higher volume selling, just a lower drift that we saw last week as well.
When stocks hit support on light volume, they tend to bounce. We saw that
happen with about an hour to go today.
A convergence of factors.
Several things came together today. Early on there were some more
downgrades that set the downward tone, and that kept the recent gloom and
doom commentators at the top of their game. They were talking down the
market even with the Fed rate cut. A floor trader interviewed on CNBC
this afternoon epitomized the view when he said that there was a school of
thought out there saying investors were going to wait for rate cuts to
actually impact the economy before investing. No, no, no. That is
emotion talking. That is getting bucked off the horse and not wanting to
get back on. That is ignoring market pricing mechanisms that have
occurred over and over again. Markets do not wait for the actual numbers.
Markets anticipate the future before it becomes fact. When the Fed cuts
rates, it is a series of rate cuts. The Fed does not stop until things
get a lot better. There are those who doubt whether this will happen this
time. Those are out there every cycle. They cite the fact that the
market has moved down since last Wednesday as proof. That is not proof;
that is part of history as well. No shot straight up, no easy milk run.
It may take Fed rate cut number two, it may not. What we are saying is
that we are not going to fight history; we are going to continue to
average in on long term positions and shorter term option plays. In a
year, you look like a genius.
Volume, however, was down all session. We were talking to one of our
brokers on the telephone this afternoon as the indexes were hitting their
lows for the session. We took a look at the VIX, and it was hitting its
high. That was with about an hour to trade. We reminded our broker of
what we said in the report over the weekend: each short-term run we have
had in the past three months started when the VIX hit between 34 to 35.
JNPR was threatening its low for the day hit in the morning as was EMLX,
AMCC, BRCM and others. When they started to bounce, we started to average
in once again.
Earnings: the bad and the good.
We have also been talking about inordinate whining over earnings that are
to come out this month. Yes warnings are 200 to 300 higher than the 374
this time last year; a weak economy will do that to you. But, we have
repeatedly said that some good earnings from the leaders would show
investors that quality wins out. They have been tossing the babies out
with the rest of the market the past few months. When good earnings come
out in these leaders, that will change.
During the session Alcoa (AA) announced better than expected earnings.
Not exactly a market leader, but nice to see. After hours we saw some
real signs that our belief is holding some water. AMZN announced it was
going to sport fourth quarter sales of $960 million, 40% ahead of last
year. Its operating loss should be less than 7% of net sales versus 26%
in the same quarter 1999. Good but not great. AMZN shares shot up after
hours, but pulled back some as the news was absorbed. ITWO on the other
hand, announced it would beat estimates with $370 million in revenue
versus $342 million expected. A strong software company that has been
roughed up announces it will clobber estimates. Is this an aberration?
Don't bet on it. Software companies were one of the last areas to suffer
from the selling. The reason is because they are making a lot of money.
The market, however, is just torching everything that has remained solid
in the belief that it must be overvalued if it is holding onto its price.
We believe we are going to see some great earnings from these companies
that is going to shake off this erroneous view that they are slowing down
and overpriced.
The moral: don't trust your emotions; trust facts and history. Now that
they have been whipped down from there perpetual bullish positions, they
have gone completely over to the other side. There are still many people
out there, including respected analysts from brokerages and mutual funds,
who just refuse to believe that things are going to be better and that
some companies will report good earnings. They refuse to accept what
history shows us when the Fed comes into the picture on the rate cutting
side, most likely because they were scorched in the downturn and many have
never lived through a prolonged bear market and have never gone back and
studied how the market performed during one of those periods. Thus, they
don't trust themselves or the market. When you have been burned all the
way down, it is hard to trust history and facts. That is, however,
precisely the time you need to be doing so.
THE ECONOMY
McTeer speaks out again.
Remember in October when Dallas Fed President McTeer cautioned investors
not to worry too much over the initial third quarter GDP numbers as they
were going to be weak but would be bolstered as the 'strong September'
numbers came in? He was trying to soften the blow, but he was way off the
mark as each revision withered the actual number further back.
Well, today he was telling investors that the fourth quarter GDP numbers
were looking weak. No surprise there, but the fact that McTeer was again
out in front of the numbers saying they were going to be weak gives us
pause. Was the fourth quarter flat to negative in GDP growth already? In
other words, was the fourth quarter the first quarter of the two needed
for an official recession? While McTeer stated while the economy was weak
in the fourth quarter, he did not think it contracted. Negative
fourth-quarter GDP growth was a possibility we and a handful of others
raised back in late November and early December. We won't know for sure
until the numbers are put out in the last week of January, but the timing
of McTeer's statement is eerily familiar.
This won't be the end of the world. After all, there is a massive amount
of gloom out there by the latecomers to the party as we discussed last
week. Our readers all knew it was going to be an ugly fourth quarter back
in August and September when we said retailers were going to be begging
for shoppers over the holidays. Those that have just come to the
realization that things are truly bad are still in the 'woe is me stage.'
We are already looking forward because the Fed is going to give us what we
need. As McTeer put it, "We are going to be very alert . . . looking for
any weakening."
GM joins the ranks of auto manufacturers having to cut back because of
slowing sales. GM announced it would cut production 21% in the first
quarter because of slack demand. Plant closures, layoffs, increasing
jobless claims; sounds like a weak economy. It is an insult to our
intelligence when Atlanta Fed President Guynn says that the slowdown the
Fed caused is "healthy" and that it will reduce potential imbalances that
were building in the economy. What imbalances? The Fed has never
annunciated these imbalances in all of its inflation rhetoric. The only
imbalance we see is the trillions on dollars lopped off of the retirement
accounts of millions of U.S. citizens. That is not a record to be proud
of. They inflated the market and then pulled the plug and left the
average U.S. citizen out to dry. Calling these actions " mostly healthy"
and "good overall" is cowardly. The levels of upset and disruption we are
experiencing are at levels not seen since 1998, 1991, and before. These
were not banner years for the U.S. economy, and we are at a loss as to how
scuttling the retirement plans of millions of citizens is an okay thing to
do.
THE MARKETS
Sliding lower on low volume all day, we saw key stocks tap support points
and turn up. The rally, mostly overlooked on the financial news stations
("a bit of a rally" as one put it), was impressive to us. The Dow churned
upwards for 100 points in the last hour. The Nasdaq was even more
impressive with a 98-point move (4.2%) off of its low for the session.
The S&P 500 jumped 20 points in its final hour, up 1.5% in that time.
These were not pansy moves either. Volumes on the indexes overall were
lighter, but the move up in the stocks and the indexes in the last hour
was on high volume. Stocks such as JNPR saw heavy buying in the last hour
and showed an increase in overall volume as the stock posted a gain. Even
on stocks that showed lower overall volume, the surge at the end of the
session was impressive. We liked what we saw and we were in there
averaging into positions again when things started to turn off the bottom.
Overall market stats:
VIX: 33.35; +1.32. The VIX closed below 34, but as noted, it spiked up
to 34.77 on its high as the indexes hit their lows for the day with about
an hour to go. That was what we noted in the weekend report that we were
looking for, and within the hour of hitting that level the indexes turned.
Not a bad indicator right now.
Put/Call ratio: 0.64; +0.01. The put/call ratio closed fractionally up,
but it spiked just over 1.0 on its high. Intraday spikes, unfortunately,
have never told the real tale of reversals that last.
NASDAQ: The Nasdaq fell slightly on lower, below average volume. The
lower volume on selling is good, but we also need to incorporate the rally
that came in the last hour on impressive volume. Down volume had a
commanding lead, but after that least hour it was up by under 200 million
shares. Quite a reversal of fortunes in just one hour.
The index was down over 4% on its low (2299.65) before the late rally.
Not a cathartic, high-volume reversal (only about 8 of those in the last
few months of 2000), but a low-volume drift that reversed and ran up on
stronger volume. Notice how the selling was so much lighter on this move
down? Not much institutional dumping going on this time around.
Moreover, the index did not undercut Tuesday's or Wednesday's lows
(2273.07 and 2251.71, respectively) which keeps that rally technically
alive. If the index can continue the move up and show us solid gains in
price and volume tomorrow, that would be a positive for the prospect of
future gains.
Stats: Down 11.73 points (-0.5%) to close at 2395.92.
Volume: 1.852 billion shares (-11.9%). Down volume beat up volume 964
million to 771 million shares, but up volume made up a lot of ground in
the last hour.
A/D and Hi/Lo: Decliners still led, but fell to 1.36 to 1 (1.72 to 1
Friday). New highs fell to 54 (-4) while new lows rose to 145 (+65).
The Chart: investmenthouse.com
The index held above where the rally started. The pattern on the
candlestick chart was a pretty tight doji with a long tail. A 'long tail'
means the low for the day was well below the close. In other words, the
market opened, sellers took over and pushed the index down, but then
buyers came back in and ran the index back up to where it opened. The
buyers had the last say on the day and showed a lot of strength moving up.
That tends to show a reversal in the buying patterns and foretells a
further rise from here for the short term.
Dow/NYSE: The Dow shot lower, breaking 10,600 and the 50 day moving
average. Like the Nasdaq, it recovered in the last hour to pare its
losses. Volume was lower on the selling, falling below average. Again we
like selling to occur on ever-shrinking volume.
Stats: Down 40.66 points (-0.4%) to close at 10,621.35.
Volume: NYSE volume fell below average to 1.103 billion shares (-22.9%).
Down volume edged up volume 546 million to 523 million shares.
A/D and Hi/Lo: Advancing issues did break back over decliners 1.2 to 1.
New highs jumped up to 209 (+22) while new lows rose to 19 (+6).
The Chart: investmenthouse.com
The Dow broke below 10,600, tapping 10,516.02 on the low before it
bounced. It closed just below its 50 day moving average (10,665.95). It
is holding some support at 10,600, but it again has some more work ahead
of it to clear the 50 day and 200 day moving averages. More importantly
is the resistance at 11,020.
S&P 500: The big caps tested support once again today on the low
(1276.29; support 1270) and then they too rallied hard in the last hour.
This test of the low was just what we were calling for in the weekend
report, and it worked perfectly for timing positions. After two and three
quarters days of selling, the S&P 500 showed a doji on its candlestick
chart as well, an incredibly tight doji with a long tail. The index looks
ready for at least a short term rally itself.
Stats: Down 2.49 points (-0.2%) to close at 1295.86.
Volume: NYSE volume again fell, this time dropping below average to 1.103
billion shares (-22.9%).
The Chart: investmenthouse.com
THIS WEEK
Nothing scheduled on the economic front tomorrow, but this market is
filled with unscheduled announcements each day, particularly now that we
are heading into earnings season. Expect more warnings than positive
pre-announcements, but it looks to us as if we are going to have some more
follow through to today's late-session action. Nasdaq futures tonight are
trading about 50 points above fair value; anything can change that, but as
you have noticed in the market's movements over the past months, this is a
pattern: the selling occurs after a big move, the VIX hits 34-35, the
selling slacks off and stocks stage a late recovery in the session.
Futures are higher and the next day is a nice rally. Again, no guarantees,
but this has been the pattern.
We were using today's action to take more positions on some of the stocks
we want to own. Tomorrow we will be looking at more opportunities for
upside action, but we will not be waiting too long to get in. When we see
these reversal patterns, it is best to move in when you see the move
starting, particularly for the short term plays. These upside moves at
this point are still not showing us longevity, Fed cut or not. Thus we
have to treat them with caution and still have a mind to hit singles and
not home runs. Any rally may prove to be different and carry up farther
than we thought, but it will have to show us.
We entered positions today, and we will be looking for additional
positions early on. One thing not to forget for quicker plays is the
downside plays on the 'defensive' stocks. Many were setting up
beautifully today for downside moves that we think will come when the
techs rally next. We are excited about some good, fast singles on these
plays as we watch the stocks and options we positioned ourselves in over
the past few days with the averaging techniques we have been discussing
start to turn profitable for us in a market rally in the non-defensive
stocks. That is the name of the game now, positioning for the moves up
and moves down, averaging into positions for the moves up and taking
advantage of the moves down. Again, we are looking at singles on our
short term plays, and we have been averaging into long term stocks that we
really want now that the Fed is in the cutting mode. We won't do much
averaging into long term positions tomorrow (perhaps early in the day) if
the market starts further running, but we will be looking at breakouts,
short term bounce plays and downside plays, pre-announcements, and
pre-splits. There are a lot of apples to pick from.
Support and Resistance Levels
Nasdaq:
Resistance: Some at 2600. The big point ahead is the down trendline at
2745.
Support: 2200 down to 2000.
S&P 500:
Resistance: The down trendline at 1345 and previous resistance at 1360.
Support: 1270 is possible support. 1254.07 is the 2000 low.
Dow:
Resistance: 11,020. After that, 11,400.
Support: 10,600 and then 10,300. After that, 10,000.
Weekly Economic Calendar (All times Eastern). The figures are the
consensus expectations, not ours.
1-8-00
Consumer Credit for November (3:00): $8.0B versus $16.7 B prior.
1-10-00
Wholesale Inventories for November for 1/6/01 (10:00): 0.3% versus 0.3%
prior.
1-11-00
Initial jobless claims for December (8:30): 370,000 versus 375,000 prior.
Export Prices (ex. Ag.) for December(8:30): -0.1% versus -0.1% prior.
Import Prices (ex. Oil) for December (8:30): -0.1% versus -0.1% prior.
1-12-00
PPI for December (8:30): 0.1% versus 0.1% prior.
Core PPI for December (8:30): 0.1% versus 0.0% prior.
Retail Sales for December (8:30): -0.2% versus -0.4% prior.
Retail Sales (ex. Auto) for December (8:30): 0.2% versus 0.2% prior. |
